Highs Hopes for US Inflation CPI, Likely to Send USD Lower

Inflation Concerns and Federal Reserve Strategy

The Federal Reserve finds itself at a critical juncture in its fight against inflation, which appears to be stalling rather than receding. Headline inflation is expected to edge up slightly, from 2.6% to 2.7%, marking a second consecutive increase after September’s 2.5%. While some of this uptick was anticipated due to fading base effects from last year, the persistent upward trend is causing concern.

Inflation’s Persistent Impact

Although markets could typically handle inflation levels slightly above 2%, the recent memory of inflation rates soaring between 20% and 50% has left a lingering caution. This has fueled fears that:

• Labor Market Impact: Workers may demand higher wages, which could sustain inflationary pressures.
• Corporate Behavior: Businesses might increasingly seek pricing power to maintain margins.

These dynamics reinforce the belief among many observers that inflation must be decisively curtailed, rather than allowed to plateau at elevated levels.

Federal Reserve’s December Decision

The Fed remains inclined toward a rate cut in December, but this decision hinges heavily on upcoming inflation data.

• Market Sentiment: Current pricing shows an 80% likelihood of a cut, but inflation surprises exceeding 0.1 percentage points could shift expectations significantly.
• Soft Inflation Scenario: A weaker-than-expected inflation reading would validate the broader pessimism about rising inflation risks. This could:
  • Undermine the USD.
  • Boost the likelihood of additional rate cuts in 2025.
  • Propel EUR/USD above 1.06, potentially reaching 1.07.

The stakes are high as markets await today’s inflation report. The outcome could shape not only the Fed’s December decision but also broader economic narratives heading into 2025. Both sides are at risk, however, the odds are that inflation data might miss expectations today, since they quite high.